Could Worcester face fiscal cliff?

Sunday

Nov 18, 2012 at 6:00 AM

Nick Kotsopoulos Politics and the City

There is a lot of talk these days about the so-called “fiscal cliff” facing the federal government — an avalanche of automatic spending cuts and tax increases — unless the president and Congress can strike an agreement by the end of the year on measures to raise federal revenue and cut spending.

The hope by many is that an agreement can be reached in Washington before the deadline, thus averting draconian provisions that would likely wreak havoc on municipal budgets across the nation.

Even if a deal is reached, however, Worcester may still have to cope with its own version of the “fiscal cliff” and it has absolutely nothing to do with the state of the city’s finances.

As a matter of fact, the city’s budget for this fiscal year is running very much on target and its fiscal house appears to be in order.

But there are ominous budgetary clouds building on the horizon that are on the radar of more than a few folks at City Hall.

The concern is this: state revenues for this fiscal year are trending well below budget benchmarks, to the tune of about $256 million, or about 3.8 percent below their revenue benchmark expectations, as of Oct. 31.

In comparison, through the same period a year ago state revenues were only about $20 million below benchmark.

So, what concern is it of the city of Worcester if state revenues continue to lag so seriously behind expectations?

Well, it’s because the state and the city are pretty much joined at the hip — more than half the money in the municipal budget comes in the form of local aid from the state.

In other words, as the state goes, so goes the city.

City Manager Michael V. O’Brien said if the current revenue shortfall trend is annualized over the entire fiscal year, the shortfall for the state would equate to $700 million.

He said such a dramatic shortfall would likely require midyear 9-C cuts in the city’s budget for this fiscal year, if the governor was forced to reduce the annual state allocation to cities and towns, and significant budget cuts next fiscal year as well.

It was only three years ago when Gov. Deval L. Patrick had to make a midyear cut in the local aid allocation to cities and towns when state tax collections were running about $1 billion below projections.

The impact to the city was significant, as it lead to the virtual dismantling of its Division of Public Health, the virtual elimination of the Office on Disabilities, a number of layoffs and reductions in some municipal services.

It wasn’t pretty to say the least and the city does not want to see a repeat of that.

But Mr. O’Brien pointed out that city-side municipal services are supported annually by $40 million of unrestricted state local aid, while the city’s public schools are funded at more than $200 million by all state sources, including Chapter 70 Education Aid.

As a result, any midyear cut in local aid by the state would likely hit the city and its public schools hard.

Mr. O’Brien said non-school local aid funding has already been radically reduced by some 35 percent, from the $62 million the city received in unrestricted local aid funding in 2008. To put things into perspective, the local aid allotment the city is to receive this fiscal year is equivalent to the amount it received from the state in 1988.

“It is very clear that our worlds are economically tied — as the commonwealth goes, so goes the city,” Mr. O’Brien said

While folks at City Hall aren’t panicking by any means, caution is the word of the day over there when it comes to the budget. Mr. O’Brien said he will be carefully reviewing all budgeted personnel requests and filling them on a case-by-case basis.

“Clearly, we would need to take additional actions if the commonwealth’s revenues continue to fall well below their benchmarks and that reality forces them to take actions to reduce local aid in either fiscal 2013 (this fiscal year) and/or fiscal year 2014,” he said.

In his opinion, there is no significant change in the existing budgetary estimates of revenue available to meet expenditures for this fiscal year.

While Mr. Gonzalez does not believe there is currently a sufficient basis to review the state’s revenue estimates for this fiscal year, he said he is mindful of a number of potential risks that could subsequently require a downward revision of that estimate.

He said, based on the certifications of the commissioner of revenue, it is possible that the state income tax rate will be reduced from 5.25 percent to 5.2 percent, effective Jan. 1. That would reduce income tax receipts in the second half of this fiscal year by about $57 million.

Finally, Mr. Gonzalez said, if the federal government is unable to avert its fiscal cliff, economists believe it would likely result in another economic recession, which would adversely impact state tax revenue collections.

No wonder there is reason for concern at Worcester City Hall.

The events of the rest of this month and next month in Washington in regards to the federal government’s “fiscal cliff” and which way state tax collections trend for this month and next could go a long way to determining whether Worcester will have to brace for its own “fiscal cliff.”

For now, city officials can only keep their fingers crossed and hope for the best.